What Happens To Lawsuits In A Chapter 7 Bankruptcy?

05 Jun What Happens To Lawsuits In A Chapter 7 Bankruptcy?

When you file for bankruptcy, most lawsuits brought against you are stopped. An action that requests money damages will usually go away when the bankruptcy is discharged. Actions that require some other kind of relief sometimes last beyond the bankruptcy. And some lawsuits continue during the bankruptcy such as criminal actions or some divorce matters.

If you have sued someone, or have the right to sue when you file bankruptcy, your cause of action becomes an asset of the bankruptcy estate. Like any property of the estate, the trustee can administer the asset by continuing the suit or can abandon the case. If abandoned, it becomes your property again and you can continue it.

If the trustee goes forward, she will hire an attorney to pursue the matter and any thing recovered will go in the bankruptcy estate for the payment of unsecured creditors. If there’s money left over after the costs of the suit, administrative costs of the bankruptcy, and all the unsecured creditors are paid, it will go to you.

Filing a Chapter 7 bankruptcy after you have started a lawsuit can be a risky business, however. Any asset of the bankruptcy estate can be sold by the trustee, upon court approval. Thus, if the defendant goes to the trustee and offers to buy the suit the trustee might sell it cheaply rather than pursuing or abandoning it. At a hearing to approve the sale, you can try to out-bid the defendant, but having filed bankruptcy, that might not be too easy.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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